200 Advanced Principles of Economics

Economics 200, Part 1, Fall 2005

Princeton University

Courses 2005-06: 200 504 522 554 | Blackboard | Calendars

200 Advanced Principles of Economics: Concepts and Applications

This course is designed for students who have completed a rigorous year of economics before coming to Princeton. The course uses this background theory, supplementing it with additional theoretical components, to analyze a number of economic issues of topical and intellectual interest. Topics will vary from year to year.

Part 1 is taught by Lars Svensson.
Part 2 is taught by Avinash Dixit.
Part 3 is taught by Giovanni Maggi.

See Blackbord for limitations, prerequisites, restrictions, and other information.

Announcements regarding Part 1 will be made on this page, and the page will be frequently updated. Students are required to check the page regularly.

Note: Room change to 009 Friend Center for Part 2 from Mon Oct 17.
10/12/05 Solutions to problem set 3 posted.
10/12/05 Extra office hour posted.
10/5/05 Solutions to problem set 2 posted.
10/5/05 Problem set 3 posted (to be turned in on Wed, Oct 12, at 11am).
10/2/05 Additional recommended (but not required) reading (Svensson, 2005) posted.
10/2/05 Lecture notes 5 posted.
9/29/05 Solutions to problem set 1 posted.
9/28/05 Lecture notes 4 posted (corrected).
9/28/05 Exam and solutions from Fall 2004 posted.
9/27/05 Notes on expectations and variance posted.
9/27/05 Problem set 2 posted (to be turned in on Wed, Oct 5, at 11am).
9/25/05 Lecture notes 3 posted.
9/20/05 Problem set 1 posted (to be turned in on Wed, Sep 28, at 11 am).
9/20/05 Lecture notes 2 posted.
9/19/05 A.I. office hours announced.
9/19/05 Exam for Part 1 announced.
9/8/05 Lecture notes 1 posted.

Part 1: Topics in Monetary Policy

The first third of Economics 200 in the Fall 2005 Undergraduate Program, Department of Economics, Princeton University.

Short description:

This part of the course will deal with issues such as:

How do central banks affect inflation, output and inflation in an economy like the U.S.? What are suitable objectives and institutional arrangements for monetary policy, and how do they differ between the U.S., the euro area, and the U.K.?
Should the Fed have an inflation target as Bank of England or the European Central Bank, and is the Fed sufficiently transparent about its policy?
Why has Japan been caught in a liquidity trap with deflation and recession for many years? Was there a risk that the U.S. could have fallen into a liquidity trap in 2003, and could the U.S. fall into a liquidity trap in the future?

Teacher: Lars Svensson, Office: 106 Fisher Hall, Tel: 258 0329, Email: svensson@princeton.edu.
Office hours: By appointment.
Administrative assistant: Kathleen Hurley, Office: 107 Fisher Hall, Tel: 258 4023, Email: kahurley@princeton.edu.

Class schedule: Monday and Wednesday, 11:00am-12:20pm.
Part 1, with Lars Svensson, starts Sep 19 and ends Oct 12, B02 Fisher Hall.
Part 2, with Avinash Dixit, starts Oct 17 and ends Nov 16, 009 Friend Center.
Part 3, with Giovanni Maggi, starts Nov 21 and ends Dec 14.

Assistant Instructor: Nicola Zaniboni, Email: zaniboni@princeton.edu
Office hours: Friday, 2:30-3:30pm, B10 Fisher Hall.
Extra office hour, Thursday, Oct 13, 3:00-4:00 pm.

Exam for Part 1: Friday, Oct 14, 2:30-4:30pm, B06 Fisher Hall. The exam will be closed book.

Exam from Fall 2004
Solutions to exam from Fall 2004

Requirements for part 1: Completion of a series of problem sets; completion of an exam.

Lecture notes/slides: Copies of lecture notes/slides will be available as pdf files before each class on this page. Students are expected to download and print these before each class.

Lecture notes 1
Lecture notes 2
Lecture notes 3
Lecture notes 4 (corrected 9/28/05)
Notes on expectations and variance
Lecture notes 5

Problem sets: Solutions to the problem sets will be graded and have about 60% weight in the final grade for the course. Students are allowed to cooperate on the solutions, but each student has to submit individual solutions.

Problem set 1 (to be turned in on Wed, Sep 28, at 11 am) Solutions
Problem set 2 (to be turned in on Wed, Oct 5, at 11 am) Solutions
Problem set 3 (to be turned in on Wed, Oct 12, at 11 am) Solutions

Errors: Please email me about any errors, for instance, in the reading list, the URLs, or the overhead slides.

Link to some central banks

Course plan

* indicates required reading. Other readings are suggested but not required.

Background on money, money demand and supply, central banks, open market operations, the Federal Reserve System

Baumol, William J., and Alan S. Blinder (2004), ch. 12 and 15.
*Federal Reserve Board (1994), p. 1-32.
Frank and Bernanke (2004), ch. 10, 14, and 15.
*Meyer (1998)

A realistic view of monetary policy: The transmission mechanism and suitable goals

*Svensson (2002)
*Svensson (1997)
Rudebusch and Svensson (1999)

Inflation targeting: Strict and flexible.

Bank of England, Inflation report
Bernanke (2004)
Greenspan (2004)
*Svensson (2002)
*Svensson (1997)
Rudebusch and Svensson (1999)
Taylor (1993)

The role of credibility. The debate about inflation targeting and transparency for the Fed

*Bernanke (2003a)
Bernanke (2003b)
Ferguson (2004)
Feldstein, King and Yellen (2004)
*Kohn (2003)
*Meyer (2001)
Santomero (2003, 2004)
*Svensson (2002)

Liquidity traps, the zero lower bound, and deflation

*Bernanke (2002)
*Bernanke (2003c)
Ito and Mishkin (2004)
Krugman (1998)
*Svensson (2003)
Svensson (2005)
*Ueda (2000)

Readings

Some restricted material available here.

- Bank of England (2004), Inflation Report, Monetary Policy Publications.
- Baumol, William J., and Alan S. Blinder (2004), Macroeconomics: Principles and Policy, 9th ed. or later, Thomson.
- Bernanke, Ben S. (2002), "Deflation: Making Sure `It' Doesn't Happen Here," speech on November 21, 2002, Federal Reserve Board.
- Bernanke, Ben S. (2003a), "A perspective on inflation targeting," speech at the Annual Washington Policy Conference of the National Association of Business Economists, March 25, 2003, Washington, D.C.
- Bernanke, Ben S. (2003b), "Remarks at the 28th Annual Policy Conference: Inflation Targeting: Prospects and Problems", October 17, 2003, Federal Reserve Bank of St. Louis, St. Louis.
- Bernanke, Ben S. (2003c), "Some Thoughts on Monetary Policy in Japan," speech at the Japan Society of Monetary Economics, May 21, 2003, Tokyo.
- Bernanke, Ben S. (2004), "The Logic of Monetary Policy," speech at the National Economists Club, December 2, 2004, Washington, DC.
- Federal Reserve Board (1994), The Federal Reserve System: Purposes and Functions, Washingon, DC.
- Federal Reserve Board (1996), "1996 Transcripts, July 2-3 Meeting."
- Federal Reserve Board (2004), Monetary Policy Report to the Congress.
- Ferguson, Roger W., Jr. (2004), "Safeguarding Good Policy Practice through Maintaining Flexibility," panel discussion at the Conference on Reflections on Monetary Policy 25 Years after October 1979, October 8, 2004, Federal Reserve Bank of St. Louis, St. Louis.
- Frank, Robert H., and Ben S. Bernanke (2004), Principles of Macroeconomics, 2nd ed., McGraw-Hill/Irwin.
- Greenspan, Alan (2004), "Risk and Uncertainty in Monetary Policy," speech in San Diego, January 3, 2004.
- Feldstein, Martin, Mervyn King, and Janet L. Yellen (2004), "Innovation and Issues in Monetary Policy: Panel Discussion," American Economic Review Papers and Proceedings 94 (2), 41-48.
- Ito, Takatoshi, and Frederic S. Mishkin (2004), "Two Decades of Japanese Monetary Policy and the Deflation Problem," NBER Working Paper No. 10878.
- Kohn, Donald L. (2003), "Comments on Marvin Goodfriend's 'Inflation Targeting in the United States?'," NBER Conference on Inflation Targeting, Jan 25, 2003, Bal Harbour, Florida.
- Krugman, Paul R. (1998), "It's Baaack: Japan's Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity 1998:2, 137-205.
- Meyer, Laurence H. (1998), "Come with Me to the FOMC," speech at Willamette University, Salem, Oregon, April 2, 1998.
- Meyer, Laurence H. (2001), "Inflation Targets and Inflation Targeting," speech at University of California at San Diego Economics Roundtable, July 17, 2001, San Diego.
- Mishkin, Frederic S. (2003), The Economics of Money, Banking, and Financial Markets, 7th ed. or later, Addison-Wesley.
- Rudebusch, Glenn, and Lars E.O. Svensson (1999), "Policy Rules for Inflation Targeting," in John B. Taylor (ed.), Monetary Policy Rules, University of Chicago Press.
- Santomero, Anthony M. (2003) “Flexible Commitment or Inflation Targeting for the U.S.?" speech at Money Marketeers, June 10, 2003, New York.
- Santomero, Anthony M. (2004), "Monetary Policy and Inflation Targeting in the United States," speech at the NABE/GIC Conference, October 4, 2004, Philadelphia, PA.
- Svensson, Lars E.O. (1997), "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," European Economic Review 41 (1997) 1111-1146.
- Svensson, Lars E.O. (2002), "Monetary Policy and Real Stabilization," in Rethinking Stabilization Policy, A Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, August 29-31, 2002, 261-312.
- Svensson, Lars E.O. (2003), "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others," Journal of Economic Perspectives 17-4 (Fall 2003) 145-166.
- Svensson, Lars E.O. (2005), "Monetary Policy and Japan's Liquidity Trap," working paper.
- Taylor, John B. (1993), "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy 39, 195-214.
- Ueda, Kazuo (2000), "Why the Bank of Japan Won't Target Inflation," Wall Street Journal, March 6, 2000.

Courses 2005-06: 200 504 522 554 | Blackboard | Calendars

Revised maj 14, 2006 .
Comments and suggestions are welcome.